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GROWTH

EXECUTION

ANALYSIS

REPORT

SUSTAINABILITY

2005-201

0

ANALYSIS REPORT SUSTAINABILITY 2005-201 0 Microe conomic Anal ysis of Ballarpu r Industries Li mited

Microe conomic Anal ysis of

Ballarpu r Industries

Li mited

November 15

2011

of specific individual units;

particular firms, particular hous eholds, individual prices, wages, individual industries particular c commodities. The microeconomic theory or price theory thus is th e study of individual parts of the

economy. In microeconomic a nalysis we study the demand analysis ( derive the market de mand for a good), cost analysis, production function and the m arket structure of an individual firm”

“Microeconomics is the study

Demand Analysis

Cost Analysis

Production Analysis

Market Structure

Cost Analysis Production Analysis Market Structure Submitted By: Nipun Goyal I s t Semester, MBA -

Submitted By:

Nipun Goyal I st Semester, MBA - Gen Section A University Business School

I TRODUCTIO : I DIA PAPER

I DUSTRY

T he Indian Paper Industry is a booming industry and is expected to grow in the years to come. The Indian Paper Industry is among the top 15 global players today, with an output of more than 6 millions tones annually with an estimated turnover of Rs.

150,000 millions. (approx. USD 3400 million).Paper Industry in India is riding on a strong demand and on an expanding mood to meet the projected demand of 13 million tonnes by 2020.A large number of expansion programme & expansion of capacities with an outlay of Rs. 10,000 crores have been announced covering the various sectors like paper, paperboard, newsprint etc.

The paper industry is regarded as one of the core sectors in India. The industry is estimated to grow at 7-8% compounded rate until 2010. With over 600 mills in India, only few are government owned, making it a largely private sector. Currently, the total paper market is worth around RS 200 billion. Nineteen companies members of Indian Paper Manufacturer's Association (IPMA), who control over 55% of the total aggregate industry revenue will conjointly commit Rs 2.5 billion in the next two or three years to expand additional 2 million tonnes of capacity and improve cost competitiveness.

The new millennium is going to be the millennium of the knowledge. So demand for paper would go on increasing in times to come. In view of paper industry's strategic role for the society and also for the overall industrial growth it is necessary that the paper industry performs well.

Government has completely delicensed the paper industry with effect from17th July, 1997. The Paper industry is a priority sector for foreign collaboration and foreign equity participation upto 100% receives automatic approval by Reserve Bank of India. Several fiscal incentives have also been provided to the paper industry, particularly to those mills which are based on non-conventional raw material.

The usage of paper cannot be ignored and this awareness is bound to bring about changes in the paper industry for the better. It is a well known fact that the use of plastic is being objected to these days. The reason being, there are few plastics which do not possess the property of being degradable, as such, use of plastic is being discouraged. Excessive use of non degradable plastics upsets the ecological equilibrium. (Indian Paper Industry/Paper Watch n.d.)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

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What keeps the Indian Paper industry rolling?

I n order to keep the Indian Paper industry rolling, the foremost thing which must be kept in mind is the availability of the raw materials. Every possible effort is to be made to take India at par with the other paper industries of the world. Application of paper is

varied and one cannot think of a life without paper. The raw materials need to be of good

quality. There should be enough modernized techniques to carry out production. Reducing costs should be accompanied by low cost of production. Policies should be implemented to bring about optimum production.

Softwood producing wood fibers make up the main raw material in the manufacturing process worldwide. China and India are excluded from this category. The reason being wood products availability is meager. Instead, straw, bagasse which are obtained as residues from the agriculture industry are used for the production of paper. Indian paper industry uses used paper for the manufacturing of paper after recycling. It has been estimated that around 40% of paper used is recycled.

BILT: Ballarpur Industries Limited

B allarpur Industries Limited (BILT) is a flagship of the US$ 4 bn Avantha Group and India's largest manufacturer of writing and printing (W&P) paper. The current chairman of the company is Gautam Thapar.

BILT's subsidiaries include Sabah Forest Industries (SFI), Malaysia's largest pulp and paper company, and BILT Tree Tech Limited (BTTL), which runs BILT's farm forestry programme in several states in India.

BILT has six manufacturing units across India, which give the company geographic coverage over most of the domestic market. BILT has a dominant share of the high-end coated paper segment in India. The company accounts for over 50% of the coated wood-free paper market, an impressive 85% of the bond paper market and nearly 45% of the hi-bright Maplitho market, besides being India's largest exporter of coated paper.

BILT’s acquisition of SFI in 2007 was a watershed event – it was the first overseas acquisition by an Indian paper company. This acquisition transformed BILT into a major regional player, and elevated the company's ranking among the global top 100. (Ballarpur Industries Limited n.d.)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

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DEMA D A ALYSIS Determinants of Demand for Paper

a) Advent of Global Business Houses: The advent of more and more global business houses in different sectors has created more and more need of communication needs. Paper being one of the strongest pillar of any communication, needs have increased many times. Varied applications of the fine paper for annual reports, CSR reports, catalogues, brochures, business cards, carry bags and packaging etc, makes this product extremely important for the corporate world.

b) Changing lifestyles: With improving domestic living standards, demand for speciality paper (tissue paper, fine art paper, business card paper and greeting card paper) has increased. Moreover, the bent of young generation towards reading habit has increased the demand of paper.

c) Increasing presence of modern retail formats: Opening of realty and retail sectors, have increased the demand of paper and its uses in various type of communication application. Following reasons have also contributed the growing demand for fine paper.

The advent of more and more branded paper.

The growing acceptance of specialty paper.

d) Government Educational Policies: Demand for writing and printing paper is expected to grow owing to the opening of more schools and colleges, driven by the government’s thrust on education sector and overall economic growth. Example:

“Sarva Shiksha Abhiyaan”.

e) Packaging industry: The Indian paper industry has close linkages with economic growth as higher industrial output leads to increased demand for industrial paper for packaging, increased marketing spend benefits the newsprint and value-added segments, and increased education and office activities increase demand for writing and printing paper.

f) Low per capita consumption: India’s per capita paper consumption grew 10.6% in 2009-10 (from 8.3 kg in 2008-09 to 9.18 kg) compared with 42 kg in China and 350 kg in developed countries (Source: Assocham), implying a large scope for demand.

g) Population growth: According to 2011 census of India, India’s population accounts for 17.5 % of the world’s population. India added 181 million to its population since 2001 and it is expected to grow at a very high rate. With the increasing population more paper and paper products will be needed to satisfy the needs of the people. Moreover the average age per person of India is around 26 years which clearly indicates that there would be more demand for education which would further boost the demand for paper.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

3

h) Level of literacy: According to 2011 census of India, literacy rate increased to a total of 74.04% from 64.83% in year 2001, which further indicates that with the increased level of literacy, the demand for paper is expected to rise.

i) Growing economy: With the growing economy of India, there will be more demand for paper products as consumers will have higher paying capacity.

j) Growing circulation and readership: Owing to the increased level of literacy, the newspaper circulation and readers are also growing at a very high rate. Thus the demand for paper is likely to rise.

k) Export opportunity: A number of European and US paper mills are shutting down owing to overcapacity and cost issues, an attractive export opportunity for Indian paper mills. Besides, Indian paper manufacturers, utilising agriculture-based raw material, possess a sustainable growth opportunity on account of growing environment consciousness.

For more details please refer to the below:

 

PAPER

     

S.

O

TYPE

USES

VARIETIES

DEMA D DRIVERS

 

1

Writing and

 

Creamwove, maplitho, paperboard, copier and coated paper

Population growth, level of literacy, public and private spending on education, level of business activity, increasing presence of modern retail formats and growth in the printing industry

 

printing paper

Writing, printing, stationery

 

2

Paperboard

Industrial purpose

Kraft paper, recycled board and virgin board

Growth in the packaging industry, industrial production and development in packaging technology and substitution by other materials

 

3

Speciality

Tissue paper, fine art paper, paper for specialised industrial usages such as steel mill kraft, insulation grades, etc

Duplex, grey and white board and MG posters

Consumption of this paper variety is linked to the standard of living as well as per capita income.

 

paper

 

4

Newsprint

Printing of

Glazed and standard paper

Growing economy, growing circulation and readership

 

paper

newspapers and

magazines

   

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

4

REGRESSIO A ALYSIS

R egression analysis is a statistical tool for the investigation of relationships between variables. Regression analysis includes any techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent

variable and one or more independent variables. More specifically, regression analysis helps one understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed.

Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables.

A large body of techniques for carrying out regression analysis has been developed. Familiar methods such as linear regression and ordinary least squares regression are parametric, in that the regression function is defined in terms of a finite number of unknown parameters that are estimated from the data. onparametric regression refers to techniques that allow the regression function to lie in a specified set of functions, which may be infinite- dimensional.

Linear Regression

L inear regression is an approach to modeling the relationship between a scalar variable Y and one or more variables denoted X. In linear regression, data are modeled using linear functions, and unknown model parameters are estimated from

the data. Such models are called linear models. The various regression equations which can

be used for forecasting exercise are:

Fitting Simple Linear Regression: In this case a straight line is fitted to the data containing one dependent variable and only one independent variable, e.g.,

Sales = a + b*(Price)

Fitting of the straight line can be done by following methods:

i. Graphical Method

ii. Least Squares Method

i. Graphical Method: In graphical method, we plot the sets of data of the two variable (dependent and independent variable) on the graph and a line is drawn through all the points. Thereafter, the movement of the series is assessed and future values of the variable are forecasted.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

5

Figure 1.0 shows how to p roject trend by graphical method, using the

paper products from the n umerical example of Ballarpur Industries Lim ited cited below:

figures on sales for

 

Bilt Sales

Y

ear

(In Rs. crs… )

2

001

1578

2

002

1553

2

003

2146

2

004

2280

2

005

2011

2

006

2085

2

007

2376

2

008

1050

2

009

1076

2

010

1,100.00

2800 2376 2280 2400 214 6 2085 2011 2000 1578 1553 1600 1100 1076 1200
2800
2376
2280
2400
214
6
2085
2011
2000
1578
1553
1600
1100
1076
1200
1050
800
400
2001
2002
200 3
2004
2005
2006
2007
2008
2009
2010
Figure 1.0 Graphical Trend
Figure 1.0 Graphical Trend

ii. Least Squares M ethod: Least squares estimation is a powerf ul tool to estimate

the coefficients of a linear function. It is based on the minim isation of squared

deviations between method, we fit the

the best fitting line and the original observa tions given. In this

equations and then

data on demand and time in the form of

Microeconomic Analys is of Ballarpur Industries Limited,

Year: 2 005-2010

6

project the demand for the future period. These equations are termed as normal equations and the task of least square method is to find out the values of the coefficients in these equations.

The Equation of the linear trend is given by: Y =a + b X, where a is the intercept of the demand curve, b is the slope of the curve (a and b are known as regression coefficients) and X is the deviation from mean of independent variable. We can find the values of a and b using the normal equations:

∑Y= n.a + b∑X

∑Y.X= a∑X + b∑X 2

Let us explain linear trend projection with the help of a numerical example, data being the same as taken in the graphical method:

Here n=9, i.e. odd and therefore, we shift the origin to the middle time period, viz., the year

2006.

 

Computation Of Trend Values (Standalone Data)

Year

BILT Sales (In Rs. Crs…)

     

Trend Values

(t)

(Y)

X=t - Middle Pt.

X

2

X*Y

Y= 1740.77 – 118.61x

2002

1553

-4

16

-6212

2215.21

2003

2146

-3

9

-6438

2096.6

2004

2280

-2

4

-4560

1977.99

2005

2011

-1

1

-2011

1859.38

2006

2085

0

0

0

1740.77

2007

2376

1

1

2376

1622.16

2008

1050

2

4

2100

1503.55

2009

1076

3

9

3228

1384.94

2010

1,100.00

4

16

4400

1266.33

 

∑Y= 15677

∑X= 0

∑X 2 =60

∑X*Y= -7117

 

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

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2500 2215.21 2096.6 19 77.99 2000 1859.38 1740.77 1622.16 1503.55 1500 1384.94 1266.33 1000 500
2500
2215.21
2096.6
19
77.99
2000
1859.38
1740.77
1622.16
1503.55
1500
1384.94
1266.33
1000
500
2002
2003
2 004
2005
2006
2007
2008
2009
2010

The equation for linear trend i s given by Y= a + b.X

The normal equations for esti mating a and b are:

∑Y= na + b∑X

an d

∑Y.X= a∑X + b∑X 2

15667= 9a + 0

-7117= 0 + 60b

a= 15667/9

b= -7117/ 60

a= 1740.77

b= -118.6 1

Solving the normal equations we get a= 1740.77 and b= -118.61

Hence the equation for linear t trend is Y= 1740.77 + (-118.61)X

i.e. Y= 1740.77 – 118.61X

*

--- ------------

Trend values for the years 200 2 to 2010 are obtained on putting the value

to the given year and have bee n tabulated in the last column of table drawn above.

of X corresponding

Similarly, we can find the e stimate sales of the commodity for 2011 obtained on putting X= 5 in * equation, i.e.

and same will be

Y 2011 = 1740.77 – 118.61 X 5

= 1147.72(Rs. In Crores)

Microeconomic Analys is of Ballarpur Industries Limited,

Year: 2 005-2010

8

Ballarpur Industries Ltd. (Consolidated Data) Linear Regression: Income vs Raw Material

All Figures In Billion Rs…

 
 

Income

Raw Material Expenses

   

Trend Values

Year

(X)

(Y)

X

2

X.Y

Y= -3.576 + 0.546 X

2005

20.2

7.4

408.04

149.48

7.4532

2006

21.7

8.1

470.89

175.77

8.2722

2007

25.6

10.3

655.36

263.68

10.4016

2008

31.9

12.8

1017.61

408.32

13.8414

2009

30

13.4

900

402

12.804

2010

40.3

19.2

1624.09

773.76

18.4278

 

∑X= 169.7

∑Y= 71.2

∑X 2 = 5076

∑X.Y= 2173

 
25 20 18.4278 19.2 13.8414 15 12.804 10.4016 13.4 12.8 10 8.2722 7.4532 10.3 8.1
25
20
18.4278
19.2
13.8414
15
12.804
10.4016
13.4
12.8
10
8.2722
7.4532
10.3
8.1
7.4
5
0
2005
2006
2007
2008
2009
2010
ACTUAL RAW MATERIAL EXPENSES (Y)
TREND LINE : Y= -3.576 + 0.546 X
Microeconomic Analysis of Ballarpur Industries Limited,
Year: 2005-2010
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Ballarpur Industries Limited (Standalone Data) Linear Regression: Income vs Raw Material

All Figures In Billion Rs…

 
 

Income

Raw Material Expenses

   

Trend Values

Year

(X)

(Y)

X

2

X.Y

Y= -0.6314 + 0.474 X

2001

14.90

5

222.01

74.5

6.4312

2002

14.50

5.03

210.25

72.935

6.2416

2003

19.90

8.7

396.01

173.13

8.8012

2004

20.70

9

428.49

186.3

9.1804

2005

18.20

8.6

331.24

156.52

7.9954

2006

19.10

8.7

364.81

166.17

8.422

2007

21.80

10.20

475.24

222.36

9.7018

2008

10.20

4.6

104.04

46.92

4.2034

2009

10.70

5.1

114.49

54.57

4.4404

2010

10.90

5.12

118.81

55.808

4.5352

 

∑X= 161

∑Y= 70

∑X 2 = 2765

∑X.Y= 1209

 
12 10.2 10 9 8.7 8.6 8.7 9.7018 8 9.1804 8.8012 8.422 7.9954 6 5
12
10.2
10
9
8.7
8.6
8.7
9.7018
8
9.1804
8.8012
8.422
7.9954
6
5 5.03
5.1
5.12
4.6
6.4312
6.2416
4
4.4404
4.5352
4.2034
2
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
ACTUAL RAW MATERIAL EXPENSES (Y)
TREND LINE:
Y= -0.6314 + 0.474 X
Microeconomic Analysis of Ballarpur Industries Limited,
Year: 2005-2010
10

on Linear Regression

onlinear regression is a form of regression analysis in which observational data are modeled by a function which is a nonlinear combination of the model parameters and depends on one or more independent variables. The non linear equation can take

any one of the forms : parabolic, logarithmic, exponential etc. depending on the way the trend of the dependent variable behaves.

Fitting on-Linear Regression: Some of the popular methods are the following:

i. Logarithmic Model:

Y= a.b X

Taking logarithm on both sides, we get , Log Y= Log a + X Log

i.e. Y 1 = A + B.X ,where Y 1 = Log Y , A= Log a and B= Log b

Normal Equations for estimating A and B are:

∑Y= n.A + B∑X

∑X.Y= A∑X + B∑X 2

We solve these equations to get the value of A and B and finally we get, a= antilog A and

b= antilog B.

ii. Parabolic Regression Model: Sometimes we need to fit a curved trend line which by a change in variable, could not be reduced to a linear form. The curved line can be second degree polynomial or third degree polynomial etc. Let us assume that it is a second degree polynomial given by the equation:

Y= a +b.X+c.X 2

The normal equations for calculating a, b and c are:

∑Y= na + b∑X+ c∑X 2

∑X.Y= a∑X + b∑X 2 + c∑X 3

∑X 2 .Y= a∑X 2 + b∑X 3 + c∑X 4

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Year: 2005-2010

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iii.

Multiple Regression Analysis: When more than one independent variable is taken in the regression model, we get multiple regression coefficients and equations. A multiple regression model, say for sales, may be stated as:

Sales = a*price + b*advertising + c*income + d*rivals price levels + e*personal disposable income + u, where a, b, c, d and e are the partial regression coefficients which show the effect of corresponding variables on sales. For example, a represents the percentage change in sales as a result of 1% change in price, other things remain constant. Similarly b shows the percentage change in sales as a result of 1% change in advertising outlay and so on. The constant u represents the effect of all the variables which have been left out in the equation but have an effect on sales.

In the above equation, sales is the dependent variable and all the variables on the right hand side of the equation are independent variables. If the expected values of the independent variables are substituted in the equation, the sales will be forecasted. The main advantage of this model is that the effect of a large number of variables can be taken into account. Also, this type of model enables the businessman to experiment with what might happen under extreme or unlikely conditions. He might for example, like to find out the effect of doubling of his rivals’ price, or reducing his own advertising outlay on his total sales. He can simply inject these values into the model and get the required results.

Let us explain multiple regression analysis with the help of a numerical example.

Income = β 0 + β 1 *Sales + β 2 *Salaries & Wages + β 3 *Raw Material Expense + β 4 *Selling Expense

       

Raw Material

Selling & Dist. Expenses

Year

Income

Sales

Salaries

Expense

2005

2026.48

2011.72

105.86

740.54

39.67

2006

2169.56

2130.23

114.3

810.04

37.82

2007

2557.6

2531.5

105.73

1029.52

39.35

2008

3188.62

3052.76

34.89

1285.21

66.51

2009

3009.42

2975.03

49.12

1343.3

70

2010

4031.55

3986.5

52.03

1920.78

162.67

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

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Using SPSS software, the above written model i.e :

Income = β 0 + β 1 *Sales + β 2 *Salaries & Wages + β 3 *Raw Material Expense + β 4 *Selling Expense

Will get reduce to

Income = β 0 + β 1 *Sales + β 2 *Raw Material Expense

Now, putting values in the above equation, we get

Income = -481.441 + 1.627*Sales – 1.020*Raw Material Expense

i.e., we can analyze from the above equation that:

1. If sales are increased by 1 unit, then Income will be increased by 1.627 units.

2. If raw material expenses are increased by 1 unit, then income will be reduced by 1.020 units.

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Year: 2005-2010

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COST A ALYSIS

B y "Cost" we mean the sacrifice or foregoing that has occurred or has potential to occur in future measured in monetary terms.

The following elements are included in the cost of production: Purchase of raw machinery, Installation of plant and machinery, Wages of labour, Rent of Building, Interest on capital, Wear and tear of the machinery and building, Advertisement expenses, Insurance charges, Payment of taxes, In the cost of production, the imputed value of the factor of production owned by the firm itself is also added, The normal profit of the entrepreneur is also included in the cost of production.

The different types of costs are:

a) Actual Cost: Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good or service. The actual costs or expenditures are recorded in the books of accounts of a business unit. Actual costs are also called as "Outlay Costs" or "Absolute Costs" or "Acquisition Costs". Examples: Cost of raw materials, Wage Bill etc.

b) Opportunity Cost: Opportunity cost is concerned with the cost of forgone opportunities/alternatives. In other words, it is the return from the second best use of the firms resources which the firms forgoes in order to avail of the return from the best use of the resources. It can also be said as the comparison between the policy that was chosen and the policy that was rejected. The concept of opportunity cost focuses on the net revenue that could be generated in the next best use of a scare input. If a firm owns a land, there is no cost of using the land (i.e., the rent) in the firms

account. But the firm has an opportunity cost of using the land, which is equal to the rent forgone by not letting the land out on rent.

c) Sunk Cost: Sunk costs are those do not alter by varying the nature or level of business activity. Sunk costs are generally not taken into consideration in decision - making as they do not vary with the changes in the future. Sunk costs are a part of the outlay/actual costs. Sunk costs are also called as "Non-Avoidable costs" or "Inescapable costs". Examples: All the past costs are considered as sunk costs. The best example is amortization of past expenses, like depreciation.

d) Incremental Cost: Incremental costs are addition to costs resulting from a change in the nature of level of business activity. As the costs can be avoided by not bringing any variation in the activity in the activity, they are also called as "Avoidable Costs" or "Escapable Costs". More ever incremental costs resulting from a contemplated change is the Future, they are also called as "Differential Costs" Example: Change in distribution channels, adding or deleting a product in the product line.

e) Explicit Cost: Explicit costs are those expenses/expenditures that are actually paid by the firm. These costs are recorded in the books of accounts. Explicit costs are

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

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important for calculating the profit and loss accounts and guide in economic decision-making. Explicit costs are also called as "Paid out costs" Example: Interest payment on borrowed funds, rent payment, wages, utility expenses etc.

f) Implicit Cost: Implicit costs are a part of opportunity cost. They are the theoretical costs i.e., they are not recognized by the accounting system and are not recorded in the books of accounts but are very important in certain decisions. They are also called as the earnings of those employed resources which belong to the owner himself. Implicit costs are also called as "Imputed costs". Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity capital etc.

g) Book Cost: Book costs are those business costs which don't involve any cash payments but a provision is made in the books of accounts in order to include them in the profit and loss account and take tax advantages, like provision for depreciation and for unpaid amount of the interest on the owners capital.

h) Out Of Pocket Costs: Out of pocket costs are those costs or expenses which are paid to the outsiders of the firm. All the explicit costs fall into the category of out of pocket costs. Examples: Rent Paid, wages, salaries, interest etc.

i) Accounting Costs: Accounting costs are the actual or outlay costs that point out the amount of expenditure that has already been incurred on a particular process or on production as such accounting costs facilitate for managing the taxation need and profitability of the firm. Examples: All Sunk costs are accounting costs.

j) Economic Costs: Economic costs are related to future. They play a vital role in business decisions as the costs considered in decision - making are usually future costs. They have the nature similar to that of incremental, imputed explicit and opportunity costs.

k) Direct Cost: Direct costs are those which have direct relationship with a unit of operation like manufacturing a product, organizing a process or an activity etc. In other words, direct costs are those which are directly and definitely identifiable. The nature of the direct costs are related with a particular product/process, they vary with variations in them. Therefore all direct costs are variable in nature. It is also called as "Traceable Costs" Examples: In operating railway services, the costs of wagons, coaches and engines are direct costs.

l) Indirect Costs: Indirect costs are those which cannot be easily and definitely identifiable in relation to a plant, a product, a process or a department. Like the direct costs indirect costs, do not vary i.e., they may or may not be variable in nature. However, the nature of indirect costs depend upon the costing under consideration. Indirect costs are both the fixed and the variable type as they may or may not vary as a result of the proposed changes in the production process etc. Indirect costs are also called as Non-traceable costs. Examples: The cost of factory building, the track of a railway system etc., are fixed indirect costs and the costs of machinery, labour etc.

m) Controllable Costs: Controllable costs are those which can be controlled or regulated through observation by an executive and therefore they can be used for assessing the efficiency of the executive. Most of the costs are controllable. Example: Inventory costs can be controlled at the shop level etc.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

15

n) on Controllable Costs: The costs which cannot be subjected to administrative control and supervision are called non controllable costs. Example: Costs due obsolesce and depreciation, capital costs etc.

o) Historical Costs and Replacement Costs: Historical cost or original costs of an asset refers to the original price paid by the management to purchase it in the past. Whereas replacement costs refers to the cost that a firm incurs to replace or acquire the same asset now. The distinction between the historical cost and the replacement cost result from the changes of prices over time. In conventional financial accounts, the value of an asset is shown at their historical costs but in decision-making the firm needs to adjust them to reflect price level changes. Example: If a firm acquires a machine for $20,000 in the year 2000 and the same machine costs $40,000 now. The amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.

p) Shutdown Costs: The costs which a firm incurs when it temporarily stops its operations are called shutdown costs. These costs can be saved when the firm again start its operations. Shutdown costs include fixed costs, maintenance cost, layoff expenses etc.

q) Abandonment Costs: Abandonment costs are those costs which are incurred for the complete removal of the fixed asset from use. These may occur due to obsolesce or due to improvisation of the firm. Abandonment costs thus involve problem of disposal of the asset.

r) Urgent Costs and Postponable Costs: Urgent costs are those costs which have to be incurred compulsorily by the management in order to continue its operations. If urgent costs are not incurred in time the operational efficiency of the firm falls. Example: Cost of material, labour, fuel etc.

Postponable costs are those which if not incurred in time do not effect the operational efficiency of the firm. Examples are maintenance costs.

s) Business Cost and Full Cost: Business costs include all the expenses incurred by the firm to carry out business activities. Costs Include all the payments and contractual obligations made by the firm together with the book cost of depreciation on plant and equipment. Full costs include business costs, opportunity costs, and normal profits. Opportunity costs is the expected return/earnings from the next best use of the firms resources like capital, land and building, owners efforts and time. Normal profits is necessary minimum earning in addition to the opportunity costs, which a firm must receive to remain in its present occupation.

t) Fixed Costs: Fixed costs are the costs that do not vary with the changes in output. In other words, fixed costs are those which are fixed in volume though there are

If the time period in volume under consideration is

long enough to make the adjustments in the capacity of the firm, the fixed costs also vary. Examples: Expenditures on depreciation costs of administrative, staff, rent, land and buildings, taxes etc.

u) Variable Costs: Variable Costs are those that are directly dependent on the output i.e., they vary with the variation in the volume/level of output. Variable costs increase in output level but not necessarily in the same proportion. The

variations in the output level

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

16

proportionality between the variable costs and output depends upon the utilization of fixed facilities and resources during the production process. Example: Cost of raw materials, expenditure on labour, running cost or maintenance costs of fixed assets such as fuel, repairs, routine maintenance expenditure.

v) Total Cost, Average Cost and Marginal Cost: Total cost (TC) refers to the money value of the total resources/inputs required for the production of goods and services by the firm. In other words, it refers to the total outlays of money expenditure, both explicit and implicit, on the resources used to produce a given level output. Total cost includes both fixed and variable costs and is given by:

TC = VC + FC

Average Cost (AC) , refers to the cost per unit of output assuming that production of each unit incurs the same cost. It is statistical in nature and is not an actual cost. It is obtained by dividing Total Cost (TC) by Total Output (Q)

AC= TC/Q

Marginal costs(MC), refers to the additional costs that are incurred when there is an addition to the existing output level of goods and services. In other words, it is the addition to the Total Cost (TC) on account of producing additional units.

w) Short Run Cost and Long Run Cost: Both short run and long run costs are related to fixed and variable costs and are often used in economic analysis.

Short Run Cost: The costs which vary with the variation in the output with size of the firm as same. Short run costs are same as variable costs. Broadly, short run costs are associated with variable inputs in the utilization of fixed plant or other requirements.

Long Run Cost: The costs which are incurred on the fixed assets like land and building, plant and machinery etc., Long run costs are same as fixed costs. Usually, long run costs are associated with variations in size and kind of plant.

For the cost analysis, the consolidated data of the expenses and income statements of the company for the previous six years has been taken.

The expenses have been divided on various bases such as

Raw material expenses Marketing expenses Compensation to employees Rent and lease rent Taxes Power, Fuel & Water expenses Selling and Distribution Expenses Repair & Maintenance Expenses

These are the major heads under which expenses are found.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

17

The income has been divided on various bases such as

Income from financial services Income from non-financial services Interest Dividends Treasury operations Other Income Prior period income and extraordinary income Industrial Sales

Ballarpur Industries Ltd.

2005

2006

2007

2008

2009

2010

(all figures in Rs. Crores……)

           

Total income

2026.48

2169.56

2557.6

3188.62

3009.42

4031.55

Sales

2011.72

2130.23

2531.5

3052.76

2975.03

3986.5

Industrial sales

1877.28

2130.17

2531.32

3052.28

2974.45

3985.67

Income from non-financial services

134.44

0.06

0.18

0.48

0.58

0.83

Income from financial services

8.21

14.52

15.12

84.99

20.93

33.62

Interest

5.6

14.52

15.12

84.99

20.88

22.76

Dividends

0

0

0

0

0

0

Treasury operations

2.61

0

0

0

0.05

10.86

Other income

2.77

6.4

9.87

12.71

8.27

10.09

Prior period income & extraordinary income

3.78

18.41

1.11

38.16

5.19

1.34

Change in stock

4.7

5.58

-19.96

2.13

47.44

12.92

Total expenses

1863.05

1961.1

2282.54

2887.13

2868.98

3804.06

Raw material expenses

740.54

810.04

1029.52

1285.21

1343.3

1920.78

Purchase of finished goods

119.48

92.36

49.47

12.42

41.76

56.67

Power, fuel & water charges

225.17

246.81

326.35

446.17

441.85

546.49

Compensation to employees

123.69

128.32

140.8

207.34

219.11

248.3

Indirect taxes

211.41

215.41

207.79

198.22

120.67

104.7

Lease rent & other rent

8.61

3.23

3.32

1.77

1.33

1.17

Repairs & maintenance

51.28

54.2

53.55

62.46

37.67

56.69

Insurance premium paid

6.41

6.04

5.85

4.99

7.83

8.77

Outsourced mfg. jobs (incl. job works, etc.)

4.28

8.29

8.23

11.06

11.01

9.03

Selling & distribution expenses

39.67

37.82

39.35

66.51

70

162.67

Miscellaneous expenses

13.01

19.09

43.65

32.88

37.99

47.17

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

18

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Raw Material Cost to Income

   

Raw Material Cost

Raw Material Cost

 

Year

Income

Income

Percentage

2005

2026.48

740.54

0.365431684

36.54316845

2006

2169.56

810.04

0.373366028

37.33660281

2007

2557.6

1029.52

0.402533625

40.25336253

2008

3188.62

1285.21

0.403061513

40.30615125

2009

3009.42

1343.3

0.44636508

44.63650803

2010

4031.55

1920.78

0.476437102

47.64371024

4500 47.64 50 44.64 45 4000 40.25 40.31 37.34 40 3500 36.54 35 3000 30
4500
47.64
50
44.64
45
4000
40.25
40.31
37.34
40
3500
36.54
35
3000
30
2500
25
2000
20
1500
15
1000
10
500
5
0
0
2005
2006
2007
2008
2009
2010
Income
RAW MATERIAL COST
Ratio: Raw Material Cost to Income(in %)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

19

The cost/income ratio is (operating expenses/operating income). The cost income ratio is most commonly used in the financial sector. It is useful to measure how costs are changing compared to income - for example, if a bank's interest income is rising but costs are rising at a higher rate looking at changes in this ratio will highlight the fact. The cost-to-income ratio shows a company's costs in relation to its income. To get the ratio, divide the operating costs (administrative and fixed costs, such as salaries and property expenses, but not bad debts that have been written off) by operating income. The ratio gives investors a clear view of how efficiently the firm is being run - the lower it is, the more profitable the organization will be. Changes in the ratio can also highlight potential problems: if the ratio rises from one period to the next, it means that costs are rising at a higher rate than income, which could suggest that the company has taken its eye off the ball in the drive to attract more business.

From the data, we can clearly see that the Raw Material Cost w.r.t. Income of the company is increasing at a very excessive or exorbitant rate. The raw material cost for the year 2005 accounts for around 36.5% of the total Income of the company and accounts for around 37.3% for the year 2006. This increase in percentage tells us that the raw material costs are increasing at a higher rate than income. Similarly, for the year 2007 & 2008, the cost/income ratio (in %) is 40.25% & 40.3% i.e. for the period from 2007 to 2008 the cost/income ratio is almost constant. The cost/income ratio for the year 2009 (44.63%) is increasing at a very high rate as compared to previous years. From the year 2008-2009 the cost/income ratio increased from 40.3% to 44.63%, showing around 11% increase in the cost to income ratio and in the year 2010 the cost/income ratio again increased from 44.63% to 47.64%.

Therefore, considering the above figures, we can conclude that the company has taken its eye off the ball and there is a need to control the raw material costs of the company because the income is not growing/increasing at the same rate as costs are.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

20

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Power/Fuel/Water costs to Income

   

Power, Fuel & Water Charges

Power/Fuel/Water Costs

 

Year

Income

Income

Percentage

2005

2026.48

225.17

0.111113853

11.11138526

2006

2169.56

246.81

0.113760394

11.37603938

2007

2557.6

326.35

0.127600094

12.76000938

2008

3188.62

446.17

0.139925736

13.99257359

2009

3009.42

441.85

0.146822311

14.68223113

2010

4031.55

546.49

0.135553323

13.55533232

4500 16 14.68 13.99 13.56 4000 14 12.76 3500 11.38 11.11 12 3000 10 2500
4500
16
14.68
13.99
13.56
4000
14
12.76
3500
11.38
11.11
12
3000
10
2500
8
2000
6
1500
4
1000
2
500
0
0
2005
2006
2007
2008
2009
2010
Income(in Rs. crs
)
Power, Fuel & Water Charges(in Rs. crs
)
Ratio: Power,Fuel & Water costs to Income (in %)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

21

From the data given on the previous page, we can analyze that the Power, Fuel & Water Cost w.r.t. Income of the company is increasing at a moderate/reasonable rate. From year 2005- 2009 the Power, Fuel & Water cost w.r.t. Income increased from 11.11% to 14.68% which shows percentage increase of around 32%. From year 2008 to 2009, the company took some effective measures that resulted in decrease in power, fuel and water costs from Rs. 446.17 crs to Rs. 441.85 crs. Some of the measures taken by the company, during the period 2008- 2009, to reduce the power, fuel and water costs are:

Installation of VFD's at various locations. Installation of energy efficient pumps. Installation of energy efficient motors. Installation of electronic chokes in place of conventional chokes in lighting system of mills, CFLs in place of incandescent lamps and Metal Halide Lamps in street lighting system of mills & colony. Power Sensors in street Lighting VFDs in various equipment. Optimisation in water consumption by optimising the operation of Disc Filter at PM 1 for recycling of base water. Optimising water consumption across the mill for reduction in intake pump operating hours. Improvement in power factor 0.999 by addition of capacitors. Reduction in the idle running hrs of equipments. Maximisation of the utilization of bamboo dust consumption in boiler to save the coal. Use of CFL to conserve the lighting energy. 13.0ptimize the thermal losses by promptly attending the steam/condensate leakages.

From year 2009-2010, the power, fuel, water costs increased from Rs. 441.85 crs to Rs.546.49 crs, showing increase of 23.7% and Income increased around 34% which resulted in decrease, in the power, fuel, water costs to income ratio, from 14.68% to 13.56%.

Therefore, considering the above figures, we can conclude that the company has taken effective measures to control the power, fuel and water costs of the company during the period from 2008-2009 but has taken its eye off the ball during the period 2009-2010. So there is a need to control the power, fuel and water costs of the company which would gradually result in increase in Income of the company.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

22

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Indirect Taxes to Income

Year

Income

Indirect Taxes

Indirect Taxes

Percentage

Income

2002-2003

1699.14

116.5

0.068564097

6.856409713

2003-2004

2281.43

173.02

0.0758384

7.58383996

2004-2005

2300.59

195.2

0.0848478

8.484779991

2005-2006

2026.48

211.41

0.104323754

10.43237535

2006-2007

2169.56

215.41

0.099287413

9.928741312

2007-2008

2557.6

207.79

0.081244135

8.124413513

2008-2009

3188.62

198.22

0.062164824

6.216482365

2009-2010

3009.42

120.67

0.040097427

4.009742741

2010-2011

4031.55

104.7

0.02597016

2.597016036

4500 12 10.43 4000 9.93 10 3500 8.48 8.12 7.58 3000 8 6.86 6.22 2500
4500
12
10.43
4000
9.93
10
3500
8.48
8.12
7.58
3000
8
6.86
6.22
2500
6
2000
4.01
1500
4
2.60
1000
2
500
0
0
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Income (in Rs. crs)
Indirect Taxes (in Rs. crs)
Ratio: Indiect Taxes to Income (in %)
Indirect taxes w.r.t. income are continuously increasing from the period 2002-03 to 2005-06
and then it is continuously decreasing from the period 2005-06 to 2010-11.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

23

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Marketing Expenses to Income

Year

Income

Marketing

Marketing Expenses Income

Percentage

Expenses

2002-2003

1699.14

28.42

0.016726109

1.67261085

2003-2004

2281.43

37.66

0.016507191

1.650719067

2004-2005

2300.59

40.4

0.017560713

1.756071269

2005-2006

2026.48

22.85

0.01127571

1.12757096

2006-2007

2169.56

5.57

0.002567341

0.256734084

2007-2008

2557.6

18.93

0.00740147

0.740147013

2008-2009

3188.62

37.95

0.0119017

1.190170042

2009-2010

3009.42

39.19

0.013022443

1.302244286

2010-2011

4031.55

106.45

0.026404237

2.640423658

4500 3 2.64 4000 2.5 3500 3000 2 1.76 1.67 1.65 2500 1.30 1.5 1.19
4500
3
2.64
4000
2.5
3500
3000
2
1.76
1.67
1.65
2500
1.30 1.5
1.19
2000
1.13
1500
1
0.74
1000
0.5
0.26
500
0
0
2002-2003 2003-2004
2004-2005
2005-2006 2006-2007
2007-2008
2008-2009
2009-2010 2010-2011
Income (in Rs. crs)
Marketing Expenses (in Rs. crs)
Ratio: Marketing Expenses to Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited,
Year: 2005-2010
24

From the data, we can clearly see that the Marketing Expenses (which includes commissions, rebates, discounts, sales promotional, expenses on direct selling agents & entertainment expenses) w.r.t. Income of the company is increasing at a very moderate rate from year 2002- 03 to 2004-05. Then from year 2004-05 to 2007-08, there is a fall in the Marketing Expenses/Income ratio and accounts for around 57.71%. The reason is quite obvious that between this period company reduced the manpower, due to which company was able to cut on the commission expenses and expenses on direct selling agents.

From year 2007-08 to 2009-10, the marketing expenses/income ratio again increased from 0.74% to 1.30%, showing around 75.67% increase in the marketing expenses to income ratio. And from year 2009-10 to 2010-11, the marketing expenses to income ratio almost doubled.

As income and marketing expenses are directly proportional to each other. Therefore, considering the above figures, we can conclude that the company has taken the effective measures to control the perks and the commissions given to the employees.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

25

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Rent Expense to Income

Year

Income

Rent & Lease Rent

Rent Expense

Percentage

Income

2002-2003

1699.14

12.47

0.007339007

0.733900679

2003-2004

2281.43

18.4

0.008065117

0.806511705

2004-2005

2300.59

17.78

0.007728452

0.772845227

2005-2006

2026.48

8.61

0.004248747

0.42487466

2006-2007

2169.56

3.23

0.001488781

0.148878114

2007-2008

2557.6

3.32

0.001298092

0.129809196

2008-2009

3188.62

1.77

0.000555099

0.055509907

2009-2010

3009.42

1.33

0.000441946

0.044194562

2010-2011

4031.55

1.17

0.000290211

0.029021096

4500 0.9 0.81 0.77 4000 0.73 0.8 3500 0.7 3000 0.6 2500 0.5 0.42 2000
4500
0.9
0.81
0.77
4000
0.73
0.8
3500
0.7
3000
0.6
2500
0.5
0.42
2000
0.4
1500
0.3
0.15
1000
0.2
0.13
500
0.06 0.04
0.03 0.1
0
0
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Income (in Rs. crs)
Rent Expense (in Rs. crs)
Ratio: Rent Expense to Income (in %)
We can conclude from the above graph that the company has taken the effective measures
to control the rent expense of the company. Rent Expense as a percentage of income is
continuously decreasing from period 2002-03 to 2010-11.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

26

Ballarpur Industries Limited (Consolidated Data) Cost Analysis: Repair & Maintenance Cost to Income

   

Repair &

Repair & Maintenance Costs

 

Year

Income

Maintenance

 

Percentage

Costs

Income

2002-2003

1699.14

46.9

0.027602199

2.760219876

2003-2004

2281.43

50.31

0.022051959

2.205195864

2004-2005

2300.59

51.43

0.022355135

2.235513499

2005-2006

2026.48

51.28

0.025304962

2.53049623

2006-2007

2169.56

54.2

0.024982024

2.4982024

2007-2008

2557.6

53.55

0.020937598

2.093759775

2008-2009

3188.62

62.46

0.019588411

1.958841129

2009-2010

3009.42

37.67

0.012517362

1.251736215

2010-2011

4031.55

56.69

0.014061589

1.406158922

4500 2.76 3 2.53 2.50 4000 2.21 2.24 2.5 3500 2.09 1.96 3000 2 2500
4500
2.76
3
2.53
2.50
4000
2.21
2.24
2.5
3500
2.09
1.96
3000
2
2500
1.41
1.25
1.5
2000
1500
1
1000
0.5
500
0
0
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Income (in Rs. crs)
Ratio: Repair & Maintenance Costs to Income (in%)
Repair & Maintenance Costs (in Rs. crs)
We can conclude from the above graph that the company has taken the effective measures to
control the repair and maintenance cost of the company. Repair & Maintenance costs as a
percentage of income is continuously decreasing except for the period 2004-05 and 2005-06.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

27

Ballarpur Industries Limited Cost Analysis: Salary & Wages to Income Ratio

Year

Income

Salaries & Wages

Salaries & Wages

Percentage

Income

2005

2026.48

105.86

0.052238364

5.223836406

2006

2169.56

114.3

0.052683493

5.268349343

2007

2557.6

105.73

0.041339537

4.133953707

2008

3188.62

34.89

0.010942038

1.094203762

2009

3009.42

49.12

0.016322082

1.6322082

2010

4031.55

52.03

0.012905706

1.290570624

4500 6 5.22 5.27 4000 5 3500 4.13 3000 4 2500 3 2000 1500 1.63
4500
6
5.22
5.27
4000
5
3500
4.13
3000
4
2500
3
2000
1500
1.63
2
1.29
1.09
1000
1
500
0
0
2005
2006
2007
2008
2009
2010
Income (in Rs.crs)
Salaries & Wages (in Rs. crs)
Salaries & Wages costs w.r.t. Income (in %)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

28

From the graph, we can analyze that salaries and wages w.r.t. income is decreasing at a very high rate. Salary and wages of the employees in the year 2005 accounts for 5.22% of the total income of the company and accounts for 5.27% of the total income in the year 2006. From year 2006 to 2007, the salary expense/income ratio decreased from 5.27% to 4.13% showing around 21.6% decrease in the salary/income ratio and the ratio further decreased from 4.13% to 1.09% from the year 2007 to 2008, which accounts for around 73.6% decrease in the salary/income ratio (Reason: the employee strength of the company in the year 2007 was 6000 and in the year 2008, the employee strength was reduced to 2000 which resulted in the sharp decline in the salary/income ratio). From the year 2008 to 2010, the salary expense/income ratio is increasing at a very moderate rate.

Therefore, considering the above figures, we can conclude that the company has taken effective measures to control the salary and wages expense.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

29

Ballarpur Industries Limited Cost Analysis: Selling & Dist. Expenses to Income Ratio

   

Selling &

Selling & Distribution Expenses Income

 

Year

Income

Distribution

Percentage

Expenses

2005

2026.48

39.67

0.019575816

1.957581619

2006

2169.56

37.82

0.017432106

1.743210605

2007

2557.6

39.35

0.015385518

1.538551767

2008

3188.62

66.51

0.020858553

2.085855323

2009

3009.42

70

0.023260296

2.3260296

2010

4031.55

162.67

0.040349245

4.034924533

4500 4.5 4.03 4000 4 3500 3.5 3000 3 2.33 2500 2.5 2.09 1.96 1.74
4500
4.5
4.03
4000
4
3500
3.5
3000
3
2.33
2500
2.5
2.09
1.96
1.74
2000
2
1.54
1500
1.5
1000
1
500
0.5
0
0
2005
2006
2007
2008
2009
2010
Income (in Rs. Crs)
Selling & dist. Expenses w.r.t. Income (in %)
Selling & Dist. Expenses (in Rs. crs)

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

30

Distribution expense is a part of selling expense. It comes under the heading of selling expense. Selling expense includes various other heads like advertisement expense, distribution expense, packing expense, octroi, sales tax, hidden profit, cost of product etc. while distribution expense is the expense occured by the producer of the goods in the form of transportation cost barred by him for making the goods reach the retailers, wholesalers.

From the above data, we can clearly see that the Selling & Distribution expenses w.r.t. Income of the company is decreasing at a very moderate rate in the beginning from year 2005 to 2007. This decrease in percentage tells us that the income is increasing at a higher rate than selling and distribution expenses. From 2007-2010, the selling and distribution expenses/income ratio are increasing at a very high rate. From the year 2007-2010 the selling & dist. expenses/income ratio increased from 1.53% to 4.03%, showing around 163.4% increase in the selling and distribution expenses w.r.t. income.

Therefore, considering the above figures, we can conclude that the company has taken its eye off the ball and there is a need to control the selling and distribution expenses of the company because the income is not growing/increasing at the same rate as expenses are.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

31

PRODUCTIO A ALYSIS

T he production function for Ballarpur Industries Limited has to be calculated. The various factors which are required in the production analysis are: -

Output: - The output for the company is being depicted by the total income of the company. Labour Cost: - The total labour cost is being taken as the total compensation that is paid to the employees of the company. Capital: - The total capital cost that is taken into the company is the sum of authorised equity capital, issued equity capital and reserves.

The data is taken for the last six years (all figures in Rs. Crores….)

             

Employee

 

Authorised

Issued

Expense / Total

Total Capital / Total Income (In %)

Total

Employee

Equity

Equity

Total

Income

(In

Year

Income

Expenses

Capital

Capital

Reserves

Capital

%)

2005-06

2026.48

123.69

297.5

162.72

1330.67

1790.89

6.103687182

88.37442264

2006-07

2169.56

128.32

297.5

163.52

1471.12

1932.14

5.914563322

89.05676727

2007-08

2557.6

140.8

297.5

186

1801.58

2285.08

5.505161089

89.34469815

2008-09

3188.62

207.34

297.5

111.1

1664.28

2072.88

6.502499514

65.00868714

2009-10

3009.42

219.11

297.5

186

1719.21

2202.71

7.280804939

73.19383802

2010-11

4031.55

248.3

297.5

206

2112.27

2615.77

6.158921507

64.88248937

Now we plot the function of labour/output and capital/output:

a) Labour/ Output (in%) : The Value of Total Labour i.e. Employee expenditure and the output i.e. total income is given in the above table taken from the yearly report of BILT for 2005-06 to 2010-11. The net percentage value of Labour/Income is calculated and then plotted in the graph as shown on the next page.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

32

Labour/ Output (in %) 8 7.28 6.50 7 6.10 6.16 5.91 5.51 6 5 4
Labour/ Output (in %)
8
7.28
6.50
7
6.10
6.16
5.91
5.51
6
5
4
Labour/ Output (in %)
3
2
1
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Analysis: From the above chart, we observe that the ratio has been fluctuating over the years
but on an average the ratio is constant over the years.

Now, we observe the pattern for capital/output.

b) Capital/ Output % : The Value of Total Capital i.e. (Sum of authorized equity capital, issued equity capital and reserves) and the output i.e. total income is mentioned in the table taken from the yearly report BILT for 2005-06 to 2010-11. The net percentage value of Capital/Output is calculated and then plotted in the graph as shown below:

Capital/ Output (in %) 100 88.37 89.06 89.34 90 73.19 80 65.01 64.88 70 60
Capital/ Output (in %)
100
88.37
89.06
89.34
90
73.19
80
65.01
64.88
70
60
50
Capital/ Output (in %)
40
30
20
10
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Analysis: We see that the ratio capital/output has decreased over the time. The reason is
though company has increased the capital spending over the time but the income has also
increased over the subsequent years.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

33

Now, we find the output as function of labour and capital using the function

Output = f(L,K), where L is the labour cost and K is the capital cost.

We define:

O = A.K α L β

where α, β are the constants. A is the technological parameter, α is the elasticity of output with respect to capital and β is the elasticity of output with respect to labour.

To obtain the values of α,β we will use regression analysis. To do so we take log on both the sides, which will give us equation:

Log O =Log A + α Log K + β Log L

The various logarithmic values for income, labour and capital are calculated. Then we use regression analysis to calculate the values of α, β thereof.

   

Employee

 

Year

Total Income

Expense

Total Capital

2005-06

10.30674232

9.09233459

10.25306891

2006-07

10.33637167

9.108294351

10.28603859

2007-08

10.40783262

9.148602655

10.35890141

2008-09

10.50360277

9.316683094

10.31657416

2009-10

10.4784828

9.340662199

10.34295732

2010-11

10.60547205

9.39497672

10.41759955

Using SPSS software we get the values of A, alpha and beta. The values observed are as follows.

A = -2.001

α =

0.677

β =

0.590

α+ β = 1.267

so, we get the production function as:

O= -2.001* K 0.677 *L 0.590

So, we observe that the value of α+ β is more than 1, therefore the production function exhibits increasing returns to scale because increase in output i.e. total income is more than proportionate increase in inputs i.e. capital and labour.

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

34

MARKET STRUCTURE: I DIA PAPER

I DUSTRY

T he Indian Paper Industry is a booming industry and is expected to grow in the years to come. The Indian Paper Industry is among the top 15 global players today, the industry offers an output of nearly six million tonnes, and the industry is working

towards the objective of attaining a production capacity of 13 million tonnes by the end of the year 2020.Indian paper industry is poised to grow and touch 11.5 million tonnes from 9.18 million tonnes in the year 2011-12 from 2009-10 at the rate of 8% per annum. According to ASSOCHAM paper on “Growth of Paper Industry in India“, per capita paper consumption increased to 9.18 kg in 2009-10 as compared to 8.3 kg during 2008-09. Still, the figure is low (9.2 kg) compared to 42 kg in China and 350 kg in developed countries. India has emerged as the fastest growing market when it comes to consumption, posting 10.6% growth in per capita consumption of paper in 2009-10.

India produces many varieties of papers, namely, printing and writing paper, packaging paper, coated paper and some speciality paper. Varieties under printing and writing paper are creame wove paper, super printing paper, maplitho paper (non-surface and surface size), copier paper, bond paper and coating base paper and others. The varieties under packaging paper are kraft paper, boards, poster paper and others. The other varieties under coated paper are art paper/board, chromo paper/board and others. There are approximately 600 paper mills in India, with capacity ranging from 3 to 700 TPD, of which sixteen are major players.

Market Structure

Seller

Seller Entry

ature Of Product

Buyer

Buyer Entry

umber

Barriers

umber

Barriers

 

Very

   

Very

 

Perfect Competition

Large

No

Homogeneous

Large

No

Monopolistic competition

Many

No

Heterogeneous

Many

No

Oligopoly

Few

Yes

Homogeneous or Heterogeneous

Few

No

Monopoly

One

Yes

Unique

Many

No

Monopsony

Many

No

Homogeneous or Heterogeneous

One

Yes

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

35

 

Market Structure Comparison

 
 

umber

Market

Elasticity

of

Product

differenti

Excess

Efficiency

Profit

maximization

Pricing

of firms

power

demand

ation

profits

condition

power

Perfect

   

Perfectly

       

Price

Competition

Infinite

None

elastic

None

No

Yes

P=MR=MC

taker

     

Highly

 

Yes/No

     

Monopolistic

elastic

(Short/

Price

competition

Many

Low

(long run)

High

Long)

No

MR=MC

setter

       

Absolute

       

Relatively

(across

Price

Monopoly

One

High

inelastic

industries)

Yes

No

MR=MC

setter

Indian Paper Industry is Monopolistic competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products.

Monopolistic competition is a market situation in which there are many sellers of a particular

product, but the product of each seller is in some way differentiated in the minds of

consumers from the product of every other seller.

Examples of Monopolistic Competition:

For example, BILT supplies branded goods like Sunshine Super Printing, BILT Classic, Magna Print, Wisdom Print, BILT TA NSD and Easy Print. The copier paper is available as BILT Copy Power, BILT Image Copier, BILT Matrix and BILT Ten on Ten. There are many other firms in the market which sell similar paper products (not identical) with different brand names like:

Company

Product ame

ITC PSPD

Digi Art, Perma White, HiZine, Alfa Zap

JK PAPER LIMITED

Notepad, JK Printerblank, JK Prisitne Cote, JK IV Board, JK Endura, Cedar

TAMIL NEWSPRINT

Ace Marvel, Perfect Copier, Commander A4

CENTURY PULP & PAPER

Century Green, Century Elanza,

AP PAPER MILLS

Andhra Royal Silk, Andhra Primavera, Andhra Starwhite & Reflection

Microeconomic Analysis of Ballarpur Industries Limited,

Year: 2005-2010

36

Major Players

 

Market

Total

et

   

Total

Sales

et

ame

Capital

Assets

Worth

Investments

Income

Expenses

Turnover

Profit

Ballarpur Ind

1,638.81

2,513.39

1,651.30

1,151.03

1,092.25

875.03

1,059.12

30.16

Tamil Newsprint

680.69

2,403.88

915.79

1.14

1,251.12

888.36

1,184.45

148.99

AP Paper Mills

638.11

996.3

502.94

16.64

634.98

484.21

792.64

44.94

Rainbow Papers

575.2

702.38

285.01

0

388.63

299.47

394.99

37.1

JK Paper

549.1

1,127.26

588.90

82.77

1,377.95

1,112.18